What games can learn from airline loyalty programs (pt 1)

Going direct-to-consumer (D2C) has been the driving force behind some of the world’s biggest industries:

• For fashion, selling directly to consumers on Instagram and other digital platforms lets brands cut out the middleman (brick and mortar retail and aggregators like Net-a-Porter) to offer better deals and foster a loyal online community.
• Casinos use their D2C strategies to gain a competitive advantage in a field where the games and services are pretty much identical. Offering their highest spenders reasons to keep returning and spending more lets them stand out while increasing revenue and retention. 
• And airlines designed mileage programs that are now the cornerstone of their monetization strategies, increasing their razor-thin profit margins and encouraging brand loyalty.

In this blog series, we’re diving deeper into these three industries - retail, casinos, and airlines - to explore how they leverage their direct relationships with consumers to address their main challenges, increase brand loyalty, and boost revenue. By examining the direct-to-consumer strategies across these industries, we’ll pull out best practices that directly apply to gaming.  

It’s airlines that we’re focusing on for the first installment of this series. Some of the best loyalty programs in gaming, like Huuuge and Playtika, have taken a page directly out of the airlines industry’s book. Let’s explain.

Let’s start by highlighting the main challenge in the industry: profit margins.

The challenge for airlines: Extremely low margins

Aviation industry revenue is expected to reach $964 billion in 2024. Looking at that number, you wouldn’t think any airline is struggling for profit. But the reality is, airlines operate at extremely low margins.

There’s a great adage in the airline industry: Airlines make less profit per passenger than the cost of a cup of coffee. To be exact, this number is $2.20 per passenger, according to IATA - which amounts to an average 1.2% profit margin. 

Sounds familiar, right? In gaming, you’re also running on a profit model that requires LTV to be greater than CPI. But as the costs of UA rise, it gets harder to be in the black - and the margins feel like they just keep shrinking.

The solution: Loyalty programs that extend beyond air travel

Enter: loyalty programs, which became airline companies’ primary D2C strategy. Going back to the late 1970s, significant deregulation in the aviation industry in the US meant airlines had to consider how to stand out in the market and handle greater competition for the first time. Through frequent flyer programs, airline companies were able to gain a market advantage and encourage higher spend - at almost no cost. 

Frequent flyer programs are all gain and no cost

It all comes down to unit economics. As we’ve already seen, the profit per seat sold is extremely minimal. That’s because airlines don’t rack up costs based on how many seats are filled; instead, their costs accumulate from how many planes are flown. Basically, it costs the same to fly a plane completely full as it is flying one that’s half full. Their real costs come from just operating the flight itself:

• Labor/staffing is the most costly expenditure, eating up 32% of operating costs
• Aircraft rental and ownership is over 7% of costs
• Total jet fuel costs for US airlines in September 2023 was $4.77 billion, representing the second largest operating cost for airlines

The calculation for airlines is simple: if they have spare capacity, they can afford to give it to customers as long as that customer’s overall spend increases. 

Consider the opposite situation, like with a jeweler: for every diamond ring they sell for $1,000, they buy $900 worth of gold and diamonds. That means they can’t just run a 2-for-1 diamond ring special to get their customers to buy from them directly - they would be spending $1,800 on the rings and only making $1,000. 

But for an airline, there isn’t any additional cost to the extra seat they’re giving away. As long as they get even a cent more of spend from that customer, they can give them whatever empty seats or benefits there are! (The only thing to make sure of is not to cannibalize revenue. If those seats would have definitely been filled by paying customers, giving them away will cost more than rewarding them to loyalty program members.)

The upshot for airlines is that offering free seats or upgrades (when those seats would have otherwise been empty) as a reward for their loyal customers is a sweet deal. It doesn’t require any additional costs, and they can use this spare capacity as an incentive to reward loyalty and forge direct, long-lasting, and very sticky relationships with their customers. 

This is even more true for gaming. It doesn’t cost you anything to give away a skin or chest of coins to players. However, this virtual currency is immensely valuable for your users and can encourage them in the long-term to both spend and engage more.

The value of mileage programs, by the numbers

The value of mileage programs was demonstrated during the COVID-19 pandemic when airlines used their loyalty programs as collateral for loans. American Airlines, for example, secured a $10 billion bond and loan offering, using their AAdvantage program as collateral - one of the largest loans ever secured against an airline mileage program. 

By the end of 2021, loyalty revenue accounted for 16% of total revenue for the 5 largest US carriers. From 2019-2022, airline revenue only increased 5% - but loyalty revenue increased 239% and was likely the driving force behind much of the total growth.

Airlines also figured out how to directly monetize their points by selling them at a discount to partners, like credit card companies. Just like the airlines, these partners benefit from the arbitrage between the cost and value: the points that card companies buy from airlines cost less than straight cash back on card spend - but consumers value them more. Those partners then use the points to drive their own customer loyalty and spending. For example, the American Airlines’ AAdvantage partnership with the Mastercard priceless™ card gives members access to exclusive experiences, like golf getaways or a hot air balloon ride over Cappadocia, Turkey - and it drives Mastercard adoption and usage.

So the airline gets incremental revenue, the credit card company gets a loyalty tool at a good price, and customers feel rewarded. And the payoff is big! Ancillary revenue in the airline industry reached a record-breaking $117.9 billion in 2023, with much of this due to loyalty programs. For example, American Airlines’ “other operating revenue” was $3.464 billion in 2023, $2.929 (85%) of which was from loyalty marketing services.

Perceived vs actual cost

Airlines drive significant revenue from their loyalty programs by leveraging the arbitrage between the perceived value of points and their actual cost. There are two key aspects to this:

First, airlines can give away seats or perks that seem premium to customers but don't actually have a big impact on the airline's revenue. For example, giving lounge access or seat upgrades on undersold flights has a high perceived value to the customer. But it comes at minimal cost to the airline because those seats would have been empty anyway. In gaming, this is like giving free in-game skins to players: it’s perceived by the user as valuable but has little marginal cost for the developer.

Second, it's the value and cost of the virtual point currency itself that allows this arbitrage to happen. An airline's real costs are driven by how many planes are flown and what it takes to operate them - not by filling incremental seats. So the cost to the airline for giving away points for a seat that would have been empty anyway is much lower than the perceived value of those points to the customer, which is high.

Stay tuned for part two, which dives into takeaways and lessons you can apply directly to your game.